Situation 1
In competitive markets, the government must ensure that the goods and services that consumers demand are produced efficiently. There are many types of market failure and in situation one, the type of market failure is a negative externality. According to Frank (2011), externalities are benefits or costs that arise from an economic transaction received by parties not involved in the transaction, and they can be either positive or negative. In situation one, there is a negative externality because the cost of producing the cement sifters produces wastes that is released into the river that runs alongside the plant thereby polluting the river. This results into the good being over-priced because the firm does not clean the river. This failure came due to the inability of the firm to manage its wastes rather than disposing them into the river that serves the surrounding community with water.
In such as situation, the government may intervene in addressing the negative externality through charging for pollution generating behavior. Introducing a regulation that mandates corrective measures such as cleaning the river or persuading the plant to be environmentally friendly in their future operations can help correct negative externality. Government can introduce externality tax in order to correct the situation. Alternatively, the government can introduce production tax in case the government knows how much pollutants go into the river.
Situation 2
The type of market failure in this situation is positive externality of consumption. Allowing students to enjoy free tuition will result into a more productive workforce and enhance the economic growth rate for the state.
As illustrated in the diagram, the MSB lies above the MPB and the existing difference between the two constitute a positive externality. The point where socially optimal level is Q*, however, owing to the inadequate allocation of resources, the output/consumption is at Q1.
The government can intervene to allow consumers consume a good that has a positive externality through subsidy. Introducing a subsidy will increase the marginal social benefit when student receive free tuition for education (Frank, 2011). The government can ensure that all those who receive external befit pay the subsidy. Subsidizing the consumption of such good would make it cheaper. However, opponents argue that the money that the government spends on subsidy could have been spent on other sectors of the economy (opportunity cost).
Situation 3
The type of market failure in this situation is the free rider problem. By definition, “free rider problem’ refers to a situation where some people are able to enjoy a good or service without paying for them or making a contribution that cannot equal the benefit (Frank, 2011). A free rider is a person who uses or benefits from a public good but fails to pay anything towards meeting the cost. In this situation, the subdivision as has a short dirt road that serves several resents but one person decides to fix the road and asks the residents to pay their fair share, to which they refuse. In such case, the residents are free riders because they are enjoying something that they have not paid for. As far as the residents are concerned, the paved road is a public good. There, if no one is forced to pay for the good or service, then it will not be provided.
One solution for the free rider problem is to treat many beneficiaries as one consumer and share the cost among them equally (Frank, 2011). For example, the government can introduce tax or levy for road use in order to maintain the road. However, some people may not approve this idea, but most people will accept paying taxes. Another solution is to introduce a road maintenance agreement because it proves useful to residents who share a common access to all properties.
Situation 4
National defense is a public good and when one person in a give geographic region is defended from foreign attack, the other in the same region is likely protected. This means that the government cannot stop anyone from benefiting from national defense and benefiting from it does not reduce the amount of security available to other people in the same geographic region. These two factors mean that national defense faces the free rider problem. From the given situation, the idea of the president to allow the public voluntarily pay their fair share for the costs associated with national defense will not work. National defense is a public good, which must be provided by the public sector and people must be forced to pay for them through taxation.
Economists have agreed that the probable solution is to treat the public as one consumer and divide the cost among them equally (Frank, 2011). This is then paid through higher taxes to the public. As such, the United States taxpayers pay the cost of national defense indirectly. This will ensure that everyone who benefit from the service pays to meet the cost. However, some people may object this approach claiming that they do not want to support illegal wars, but majority of people accept paying taxes.
References:
Frank, R.H. (2011). The Darwin economy: liberty, competition, and the common good. Princeton, New Jersey: Princeton University Press.
